Digital banking: A reality check – The Kathmandu Post


Over the past two decades, people across the world have seen digital services transform the economy and their lives. Taxis, films, novels, delivery, noodles and doctors can all be summoned with a tap of a screen. Giant firms in retailing, car making and the media have been humbled by new competitors. Yet, one industry has withstood the tumult—banking. In rich economies, it is perfectly normal to queue in branches, correspond with your bank by post, and deposit cheques stamped with the logo of firms founded in the 19th century.

Technological advances make the current third wave of digital banks look more sustainable. The proliferation and sophistication of smartphones and tablets allow banks to offer many more services online. Instead of having to choose between queuing in a branch and sitting down in front of a computer, customers can now check balances or pay bills and now even pay for selected government services using their phones while sitting on the bus. They can deposit cheques by scanning, and accept credit card payments using their phones.

New products

Most banks in Nepal are now gushing about digital technology, fearing all the while that some born-digital usurper, large or small, will do to them what Amazon did to retailers, Google to finding information on the web, Uber to taxi drivers and Airbnb to hoteliers. Some have reorganised themselves to become nimbler, copying start-ups by forming small teams to generate, test, reject and improve ideas at speed. Apps are improving, new products are appearing and online e-commerce marketplaces are being built. Only a few are turning enthusiasm into money. The real winner is yet to be seen in the Nepali banking arena.

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Yet, change also poses risks. Because the financial system is embedded in the economy, innovation tends to create turbulence. The credit card’s arrival in Nepal around early 2000 revolutionised shopping, but it also sparked a consumer-debt culture among Nepalis. In addition, it is unclear who will win today’s battle. One dystopian scenario is that power becomes more concentrated, as a few big banks learn to exploit data as ruthlessly as social media firms do. Imagine a crossbreed of Facebook and a Nepali bank that predicts and manipulates how customers behave and is able to use proprietary economic data to squeeze rivals.

Another dystopia involves fragmentation and destabilisation. Banks could lose depositors to untested payment service providers, creating a mismatch between their assets and liabilities that could lead to a credit crunch. If bank customers transact via tech or payment platforms, banks could end up with huge balance sheets but without a direct connection to their clients.

The lessons of internationally successful digitised banks’ progress may be hard to copy in Nepal. ‘Our front-wheel seems to be going faster than our rear wheel’, reckoned a bank employee who has been working with a newly initiated digital transformation team. Without adequate know-how, training and business use cases, we find ourselves in confusion, and it is hard to transition from a continuous fire fighting mindset to a more elevated idea generation stage of digital thinking. We are struggling at all levels—mindset, toolset and skillset.

It is a common practice in all industries in the country to anticipate greater results without going through the pain of establishing a culture of agility, transforming management and creating a vision for digital business. The first lesson Nepali banks need to learn from the winners of digital banking is that talent is the key, and one cannot drive digital transformation without having a digital business strategy. Secondly, digital is not simply information technology. In simple terms, the customer comes first, which is often coined as ‘moments of truth’, not your business rules or technology because a bank’s business is just a click away from one’s competitors.

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One thing is that we started late. Most banks began overhauling their processes and computer systems around early 2005. Most have not been able to upgrade their systems to the current version to enable a purely digital experience. Most of their computing power still resides on the premises, but some have clandestinely hosted their services in the cloud. The central bank’s policy on banking and financial data to remain in-country has made digitalisation and participation in the democratisation of advanced technologies challenging. Another thing we need to do is resist complacency. It might have been tempting to be satisfied with being the biggest bank in a small and emerging economy like Nepal. Banks of any shape or size will have to adapt fast.

In moving to an online-only model, banks risk losing their most profitable clients while gaining those who are most promiscuous in their relationships with banks. Until online banks become better than the traditional sort at selling things like mortgages and getting their customers to make use of multiple offerings, they are likely to remain exciting experiments that appeal to the young and technologically adept. If they get it right, however, the threat to the brick-and-mortar banks will be serious.

Protect privacy

To tap the benefits of technology safely, the government should give consumers control over their data, protect the privacy and prevent firms from hoarding information. Innovation-friendly regulation would help. And governments should keep the system’s safety buffers at today’s overall size. If new entrants are properly capitalised, central banks could extend to them lender-of-last-resort facilities that provide shelter in a storm.

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Finally, the innovators’ group, millennials. The young generation demands more from financial institutions than older people do, and care more about values-based investing and corporate social responsibility. The young expect an answer to the question: Why are you in banking? They think bankers should care about helping people to become wealthier, not just about their own bottom line. Globally, banking’s dirty secret is that it is backward, inefficient and hidebound. Banks have formidable lobbying power, however. Wary of change, customers, politicians and unions complain when branches are closed and jobs cut. Regulators love dealing with a few big firms. The thing is that global growth is sluggish and productivity gains are hard to come by. A smartphone revolution in finance offers one of the best ways to boost the economy and spread the benefits.

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